Coronavirus pandemic brings job creation to a halt. A record 3.28 million workers filed for jobless benefits in the week ending March 21 as the impact of COVID-19 hit the U.S. economy, putting an end to the nation’s historic run of employment gains. Applications for unemployment insurance last week surged to nearly five times the previous record as millions of companies have issued layoffs or furloughs. Many service businesses like hotels, restaurants, barber shops, gyms and more have closed in response to the coronavirus pandemic, reverberating through the economy.

Recent economic expansion positions commercial real estate to withstand economic shock. Through the end of February, the economy had registered a record 113 consecutive months of job growth, expanding payrolls by more than 22 million. The unemployment rate was 3.5% last month, a 49-year low which contributed to an exceptionally tight labor market, pushing companies to increase wages. In the process, national vacancy rates are at or near cycle lows for most property types, despite elevated construction activity in several sectors, sustaining upward pressure on rents. Robust property metrics highlight the value proposition of real estate during a time of increased economic uncertainty.

Legislation creates new provisions as unemployment climbs. The sharp rise in unemployment claims, greater financial market volatility, and swift monetary and fiscal policy measures illustrate the rapidly moving nature of the coronavirus pandemic. With support from a $2 trillion stimulus package under consideration by congress, workers and business could be given a cushion against the financial fallout of the virus. The legislation widely expands unemployment insurance protections for freelance and gig workers, while also funding state coffers. Depending on the duration of the economic downturn, restaurants, hotels and other service businesses may need to staff back up fast, potentially reversing the rapid rise of the nation’s jobless rate. This would be unlike the extended period of high unemployment following the
2007-09 financial crisis.

Grocers and other essential businesses still hiring. There remains several bright spots to the labor market as large retailers including Walmart, CVS, Amazon and others are attempting to fill nearly 500,000 positions. Healthcare organizations are also adding more staff as hospitals, clinics and senior housing facilities need workers on the front-lines. While the hiring push at essential businesses is encouraging, any coronavirus induced job gains will not likely offset the layoffs the millions of workers face.
Fed makes unprecedented move to keep markets functioning. The Fed unveiled a series of measures last week in an effort to backstop financial markets and increase access to capital. The Bank committed to buy an unlimited amount of Treasury bonds and commercial mortgage-backed securities to shore up markets. It also announced new lending facilities to keep credit flowing to businesses as well as state and local governments, creating programs to purchase highly rated corporate and municipal bonds.

Employment growth remains strong. Employers added 273,000 positions in February, the strongest pace of job creation since May 2018. Figures from December and January were also revised up by a combined 85,000 jobs, producing an average monthly gain of 243,300 roles over the past three months. Hiring averaged 177,800 personnel per month last year. February’s robust recruiting metrics were sufficient to keep the unemployment rate unchanged at 3.5 percent, a 49-year low. Joblessness has remained below 4 percent for 20 of the past 24 months, a rare occurrence in American economic history.

Low unemployment, higher incomes bolster demand for commercial real estate. The tight labor market is pushing many companies to increase pay to draw top talent, sustaining annual wage growth of 3.0 percent in February. More widespread employment and higher incomes are contributing to demand for commercial space, including offices, apartments, storage units, and everything in between. National vacancy rates are at or near cycle lows for most property types, despite elevated construction activity in several sectors, sustaining upward pressure on rents. Favorable fundamentals underscore the value proposition of real estate during a time of heightened market uncertainty.

Hiring momentum could be disrupted in coming months. The worldwide spread of the COVID-19 coronavirus has disrupted global supply chains and international travel, to say nothing of the human cost. Uncertainty and concern among investors have prompted greater financial market volatility, with many indices trending down in the first weeks of March. All of these factors have the potential to disrupt hiring. While many companies are still facing labor shortages, travel restrictions, mandatory quarantines, and other preventative measures add new hurdles to an already difficult recruiting environment. The number of job openings still exceeds the number of potential hires, but the margin has begun to tighten. As employers either fill or streamline their labor needs, the pace of job growth could moderate.

Construction personnel in high demand. The construction sector added about 42,000 personnel in February, building upon the 49,000 jobs created the prior month. This recent hiring surge stands in stark contrast to last year when an average of 13,000 roles were filled each month. Pent-up demand for construction workers, exacerbated by a growing number of single- and multifamily homes in development, is likely behind this trend.
Lower interest rates potentially benefit real estate. In an effort to reassure investors, the Fed made an unannounced 50-basis-point cut to the overnight lending rate on March 3, and another cut is widely expected on March 17. Investors nevertheless continued to shift allocations to high-quality assets, driving bond yields down, including the 10-Year Treasury, which broke below the 1 percent threshold for the first time. The lower interest rate environment opens up new opportunities for commercial real estate investors during a dynamic financial climate.

I

243,300Average Number of Jobs Added per Month
Between Dec. ‘19 and Feb. ‘20

I

13
Consecutive Months
Under 4 percent Unemployment

I

I

* Unemployment through February 2020, job openings through December 2019 Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics

Better-than-expected job additions do not sway forecasts. Employers added 225,000 positions to payrolls in the first month of 2020, starting the year off on a strong foot after an average of 176,000 roles were created per month in 2019. Investors should not assume, however, that January’s more positive figures will herald accelerated growth in 2020. Both 2018 and 2019 began with elevated job creation, only for the pace of employment growth to moderate as time progressed. While last month’s figures illustrate that there is still upward momentum left in the labor market, the overall pace of hiring is continuing to slow, falling in line with current projections for 1.5 million new jobs in 2020.

Increased real estate development adds construction jobs.

The construction sector reported particularly strong employment growth last month with 44,000 new roles, well above the 12,000 positions added monthly in 2019. Elevated commercial and residential development is likely driving this gain. Both multifamily and office openings in 2020 will be near or at cycle highs, while single-family home starts recently hit their highest level since the beginning of the last recession. A national housing shortage supports the greater number of single- and multifamily deliveries, although a focus on higher-tier products could create pockets of saturation in some areas. Increased office construction is also a positive byproduct of steady hiring in the professional services and technology sectors, although the pace of arrivals may modestly weigh on fundamentals in the short term.

Health concerns in China to impact U.S. real estate.

The spread of the coronavirus could notably disrupt global supply chains and create issues for United States retailers. The most immediate impact of the virus on real estate, however, will be in the hospitality sector. Travel bans and other issues will decrease the number of visitors from China, pulling down on hotel room demand during a time of subdued revenue growth. Despite these trends, hotel occupancy and RevPAR are near historical highs, giving hotels the ability to maneuver around the current health crisis.

Low unemployment bringing people back to work. The unemployment rate inched up 10 basis points from a 49-year low to 3.6 percent in January as 183,000 people reentered the workforce after a long absence. Employers’ staffing needs amid low joblessness are encouraging more people to come back to work. This dynamic is also reflected in the labor force participation rate, which increased to 63.4 percent, its highest level since June 2013.
Wages advance faster in January. Growth in average hourly earnings improved to an annual rate of 3.1 percent in January, led by above-average gains in the mining, logging, retail trade, and financial activities sectors. The increase was partly due to higher minimum wages that took effect at the start of the year, as well as from an acute need for labor in both low- and high-skill positions. As inflation remains below 2 percent, the real value of wages is rising, adding to consumers’ discretionary incomes and bolstering spending at retailers and for other services.

December job additions affirm steady growth for 2019. Employers expanded payrolls by 145,000 positions in December, bringing the total number of jobs created in 2019 to 2.1 million. That is below the total for 2018 but close to the number of roles added in 2017. The moderate but steady pace of employment growth sustained the 49-year low unemployment rate of 3.5 percent in December.

Historically tight underemployment fuels housing demand. While the standard unemployment rate maintained its nearly 50-year record last month, the more broad-based U-6 underemployment rate declined to an all-time low of 6.7 percent. This historic decline was driven by the hiring of people who had given up looking for work as well as the promotion of part-time employees to full-time positions. By accepting recruits from underutilized segments of the labor pool, companies are granting new financial freedoms to many, benefiting commercial real estate, especially multifamily properties. The new employment opportunities are supporting an elevated level of household formation, reducing the availability for apartments and Class C units in particular, where vacancy is at a record low.

Low inflation pulls down on wage growth. The tight labor market continues to challenge employers, with some raising pay to attract talent. Average hourly earnings advanced 2.9 percent year over year in December, an appreciable gain that was marginally below the pace of previous months. A major limiting factor to wage growth has been the lack of inflation, which has remained abnormally low this cycle. Yet, even without an inflation-driven boost to earnings, consumers are still spending more. Confidence in the economy remains high and the commonly tracked ratio of household debt to GDP is at its lowest level in more than 15 years. This trend underscores the demand for shopping centers and entertainment venues, as well as hotels and storage facilities.

Labor shortage continues to change hiring dynamics. Employers are bringing on fewer personnel not because their needs have diminished, but rather due to an ongoing labor shortage. A surplus of job openings relative to potential hires has hindered recruiters for more than a year, prompting companies to raise pay and benefits. Firms are also taking advantage of underutilized segments of the labor pool by opening satellite offices in smaller cities and recruiting individuals with long job absences or limited employment histories.

Minimum wage hikes lift earnings for many. On January 1, the minimum wage increased in 21 states and 26 cities/counties, affecting a broad swath of the labor force. Average earnings should noticeably improve in January as a result. Over the next five years, at least five states will raise their minimum wage to $15 per hour, beginning with Washington, D.C., in July 2020. Pay will also appreciate in several other states that index to inflation.